FICO Credit Scores: What Do They Mean?
Since we live in an computer-driven world, it's not surprising that your ability to repay your mortgage comes down to just one number.
The years of paying your various bills: your mortgage, car payments, and credit card bills are analyzed, spindled and mutilated into a single indicator of whether you're likely to meet your future obligations.
TransUnion, Equifax, and Experian, the three major credit agencies, each have a proprietary formula for building a credit score. Fair Isaac and Cooriginally developed this score. .
While Experian still calls its score "FICO", TransUnion calls its score "Beacon" and Equifax uses "Empirica." While the formulas vary from one agency to another, all of the agencies use the following to determine a credit score:
- Credit History - How many years have you had credit?
- Late Payments - Have you paid more than 30 days late?
- Balances on your Credit Cards - How many credit card accounts do you have, and how much do you owe on them?
- Inquiries on Your Credit - How many times have lenders pulled your credit report for the purpose of lending you money?
These factors are weighted differently depending on the formula being used. Each formula produces a single number which may vary slightly by agency. FICO scores can be as low as 300 and as high as 800. Higher is better. Most borrowers who want to get a mortgage have a score above 620.
FICO makes a huge difference in your interest rate
FICO scores are used for more than just determining whether or not you qualify for a mortgage. Higher scores indicate you are a better credit risk, and thus may qualify for a better mortgage rate.
Improving your score
How can you improve your credit score? So called "credit repair" companies advertise quick fixes, but the score is calculated from your lifetime credit history, so you can't turn it around right away. (Of course you must have incorrect items removed from your credit report.)
Getting your FICO score
In order to improve your score, you must obtain the reports that the agencies use to build it. Of course, you need the score as well. Fair Isaac, the company that invented the original FICO credit score, sells FICO scores on myFICO.com. It's inexpensive to get your FICO from all three agencies, along with your credit report. They also provide helpful information and tools that help you understand how to improve your FICO score.
You can get a federally-mandated free credit report once a year from the three major credit reporting agencies by visiting AnnualCreditReport.com. These reports do not include a free credit score, but it's very inexpensive to get one at the same time.
Now that you have all the facts, you'll be a more informed consumer and you'll be better positioned to obtain the most favorable mortgage.
Curious about your FICO score? Call us at (203) 729-6681.